Liam Dann: Is a stockmarket crash coming?

The big thing keeping many in the equity markets has been the lack of an alternative. Picture / AP

Is this it … the market crash everyone feared was overdue?

We've had the melt-up. January was the best start to the year that Wall Street had seen since 1997. Now do we get the melt-down?

Or is this just a minor correction, letting some steam out of overheated markets before optimism about US growth takes hold again.

It's too early to say. But what is clear is that investors are jittery. The US economy is looking good but with that comes expectations that interest rates will rise.

After a bull run of almost nine years commentators have warned that stocks are overvalued.

The big thing keeping many in the equity markets has been the lack of an alternative.

Returns on cash in the bank have been too low. For years attempts by the US Federal Reserve to lift rates have stalled as economic data disappointed.

But as the return on 10-year US Government bonds nears 3 per cent it's starting to look like it might be real this time.

The NZX on Monday followed Wall Street's tumbles of more than 2 per cent on Friday. It closed down 2.1 per cent.

US stocks continued to fall today, with the Standard & Poor's 500 index dropping 4.1 per cent to 2,648.94 and the Dow Jones industrial average down more than 1,100 points as stocks took their worst loss in six and a half years.

Is there any good reason why this should turn into a full scale crash?

No. Interest rates rises have been well flagged – and by historic standards - they will still be low even if the Fed hikes three times this year.

But good reason and market sentiment aren't always the best of friends.

If fear takes hold then markets could tumble as nervous investors head for the safety of bonds and cash deposits.

A much better scenario would be a steady and orderly transition of funds that slows equity market growth but avoids panic.

If global economy is in as good a shape as forecasts by the IMF, World Bank and Goldman Sachs suggest then markets should hold up on the back of good corporate earnings – even as rates rise.

History suggests that scenario might be too rational to play out.

More likely is that we see increased volatility as a battle for sentiment plays out between optimists and pessimists over coming months.

We may just have to ride it out in New Zealand and hope the drama stays contained to equity markets with minimal fallout to the real economy.